India is considered to be a truly emerging market in the world at the moment. A major part of this growth is fueled by the micro, small and medium enterprises of the country. The SME sector contributes over 40% of the total GDP and remains a critical source of employment for India’s growing population. Recognizing the importance of SME growth in the post-demonetization era, the government has started many business-loan schemes for the same. Along with this, start-up businesses also have the option of going for loans from a private lender.
In cognizance with the start-up culture, the Indian Government launched the Start-up India scheme to uplift aspiring entrepreneurs in the start-up ecosystem. Start-up India is a major project by the Indian government to foster a hospitable environment for the startup business ecosystem, promote sustainable economic development, and create large-scale job opportunities.
What Is The Best Way For Start-Up Businesses To Secure Loans?
The best option for start-up businesses to secure a business loan is to approach a bank or NBFC. However, before you approach a lender, you need to be aware of the various types of start-up business loans, their features, eligibility criteria, and documents required to simplify the process. In this guide, you can find all that you need to know about start-up business loans so that you can choose the right loan product that best fits your needs.
Types of Loans for Start-up Businesses
Here are some of the common categories of loans available for start-up businesses in India
Mudra scheme is most popular among the youth of India. Micro Units Development and Refinance Agency (MUDRA) loan scheme is a Government initiated scheme which is categorized under 3 loan schemes named as Shishu, Kishor and Tarun. Under Mudra’s Shishu scheme interested applicants can get a loan up to Rs. 50,000, whereas under Kishore scheme the amount ranges between Rs. 5 lakhs to Rs. 10 lakhs. It is up to Rs. 10 lakhs if the applicant opts for Mudra’s Tarun loan scheme.
Credit Guarantee Funds Trust for Micro and Small Enterprises (CGTMSE) is another Government initiative that offers funding to MSMEs via financial institutions like banks and NBFCs. Under this scheme, first-time entrepreneurs and startup enterprises are majorly benefitted. The loan offered under CGTMSE scheme is collateral-free.
A start-up business loan in the form of a line of credit is somewhat similar to a credit card. However, the card is tied to the individual’s business instead of their credit. Under this category of loan, customers will have no obligation to pay interest on the borrowed sum for the first nine to 15 months, thereby making it easier to cover expenses whilst getting their business to a good start. The interest after the period will rise to anywhere between 7.9% and 19.9%, but the customer will only have to pay interest on the sum they use (similar to a credit card).
As part of equipment financing, the equipment bought at the time of starting the business, is kept as collateral with the bank. This enables the lender to charge a relatively low rate of interest with a slightly higher risk. The borrower is expected to repay the loan amount used to purchase the equipment using revenues generated from their business. The main benefit of equipment financing loans is that the depreciation of the equipment can be used by the customer as a tax benefit for many years.
Growth Capital and Equity Assistance Scheme by SIDBI
Entrepreneurs can also avail this unique loan from banks. Many banks and financial institutions offer loan schemes that are specifically designed to fund start-ups and their special needs. Different banks may assign different names for these Start-up Business Loans.
For instance, SIDBI offers “Growth Capital and Equity Assistance” schemes that can be used for purposes like business expansion, buying machinery, purchasing raw materials, marketing, brand building, creation of distribution network, R&D, software purchases, etc. Similarly, several other banks provide funding for start-ups.
Advantages of Start-up Business Loans
A business loan from banks can be advantageous in many ways, as compared to availing funds from some other financial institutions. Top benefits of start-up business loans are:
- Self-Certification: Self-certification and enforcement with 3 Environmental & 6 Labor Laws
- Tax Exemption: Income tax waiver for a period of 3 straight years and profit and expenditure deduction over fair market value
- Easy Winding of Company: Within 90 days under the Insolvency & Bankruptcy Code, 2016.
- Start-up Patent Application & IPR Protection: Quick paced patent filing with up to 80% discount
- Easier Public Procurement Norms: Relief from the obligation of earnest money deposit, previous turnover details and skill requirements for government tenders
- SIDBI Financing for Funds: Venture funds for start-ups by alternative investment funds
- Start-up India portal: A one-stop forum for all stakeholders of the start-up community to connect, share information and shape productive relationships in a highly competitive environment.
Eligibility for Start-up Business Loans
- The start-up business should have a detailed and convincing business plan
- It must be formed as a private limited company or a limited liability partnership
- The total turnover of the firm should not exceed Rs. 25 crores
- The company should have approval from the Department of Industrial Policy and Promotion (DIPP)
- The start-up must get patron guarantee from the Indian Patent and Trademark Office
- The company must have a recommendation letter by an incubation
Additional Reading: Government Loans for Small Business Startup in India
Documents Required to Apply for Start-up Business Loan
2 copies (passport-size)
Proof of Identity
PAN Card, Passport, Aadhaar Card, Voter’s ID, Driving License
Passport, Driving License, Aadhaar Card, Postpaid Phone Bill, Voter’s ID
Passport, PAN Card
Last six months
Proof of Income
Income Tax Returns, Salary Slips,
Bank verified signature, PAN Card, Passport
IFSC Code Proof
Canceled/scanned cheque, copy of passbook’s front page of the same bank account
Applying for start-up business loans is easy and hassle-free. Most financial institutions and banks also have an online application process for applicants. Applicants can visit the official website of the lenders, fill-up the form provided, and upload required documents. There is also an option of visiting the nearest branch of the lender and submitting the application form and documents in the physical form. Once the details and the verification are complete, the applicants will receive the loan amount directly into their bank accounts.
FAQs Start-Up Business Loans In India – Lenders, Features And Application Process
1: What are the different types of start-up business loans that I can get?
You can pick between two types of business loans offered by lenders: term loans and working capital loans. Term loans can be used for business expansion, machinery purchases, and the start-up of new initiatives. These loans can be taken out for a duration of one year to ten years. Working capital loans, on the other hand, are one-year loans that can be used to pay rent, pay employees' salaries, stock up inventories, and so on.
2: If I want to apply for a starting business loan, how old does my company have to be?
A company qualifies as a start-up if it is brand new or less than five years old. Only then you will be eligible to get a start-up loan. Also, the company's annual turnover should not exceed Rs.25 crores.
3: How much start-up business loan can I get?
The maximum loan amount available will be determined by the lender and other considerations such as the company's yearly turnover, your credit history, and so on. For example, a new business loan of up to Rs.10 lakhs can be obtained under the Mudra Loan.
4: Why is the lender asking for a business plan to get a start-up business loan?
A well-written business plan reassures a lender that your plans and ambitions are clear and precise, with business objectives and goals clearly stated. The business strategy should also spell out how the money will be used.
5: Which are the banks currently offering business loans for start-ups in India?
Most private sector and public sector banks are offering start up business loans for eligible candidates. HDFC Bank, Kotak Mahindra, TATA Capital, are some leading banks in this segment.
6: What kind of government support is available for start-up business loans?
The government of India has launched the Start-up India scheme to boost the start-up ecosystem in the country. As part of this scheme, they have various financing schemes - Mudra Loan Scheme
- MSME Business Loans in 59 Minutes
- The Credit Guarantee Scheme (CGS)
- Stand Up India Scheme
- Coir Udyami Yojana
- National Bank for Agriculture and Rural Development (NABARD)
- Credit Link Capital Subsidy Scheme
- National Small Industries Corporation Subsidy
7: How can I improve my chances of getting a business loan?
Some of the things you should keep in mind when applying for a business loan are:
- Present an effective business plan
- Shop around to find a lender with the best loan terms
- Wait to pay off some of the existing loans before applying for a new one
- Borrow based on your repayment capacity
- Submit genuine and up to date documents for quicker loan processing